Revision Flashcards
What is value? (property definition)
“Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing where the parties had each acted knowledgeably, prudently, and without compulsion.”
Three key attributes to ascertain value?
1) a property’s income producing ability,
2) the prices paid for similar properties or,
3) a property’s cost to replace.
Objective value is?
Value derived from market conditions (auctions). Market value is a mixture of; 1. Estimated amount 2. Date of valuation 3. Willing buyer/willing seller 4. Highest and best use
Subjective Value is?
Value that takes into consideration; age, historical meaning, location.
Ratcliffe defines value as?
- A price in dollar terms.
- A prediction (the valuer simulating the sale).
- A probability (valuation is imprecise and the valuer should tell his client what probability attaches to the estimate).
- A pragmatic-objective value – based on the actual real estate market.
Describe ‘Highest and best use’
The most probable use of a property, which is physically possible, appropriately justified, legally permissible financially feasible and which results in the highest value of the property being valued.
The 4 characteristics of value are;
- Utility
- Scarcity
- Demand
- Transfer-ability
Describe the Sales approach (comparable sales approach);
In its simplest form the sales approach involves comparing like with like.
The 5 main steps in the sales approach are;
STEP 1: Sales and Physical Data are Collected and Verified
STEP 2: Select the Most Comparable Sales-Sufficient Quantity to Distinguish Market Pattern
STEP 3: Analyse Sales Using the Appropriate Unit of Comparison
STEP 4: Compare the Sales Evidence to the Subject Property Using the Unit of Comparison
STEP 5: Estimate the Value of the Subject Property
Describe the Cost approach;
A cost (less depreciation) valuation methodology. Except in Insurance Valuations the cost approach cannot stand on its own. It should be used together with one or more of the other main valuation techniques.
The 4 main steps in the Cost approach are;
- Estimate land value (from sales evidence).
- Estimate current replacement cost of the improvement: SQUARE metres x COST PER m2 = CURRENT REPLACEMENT COST
- Estimate and subtract depreciation: REPLACEMENT COST – DEPRECIATION = PRESENT VALUE OF IMPROVEMENT
- Add back land value: LAND VALUE + PRESENT VALUE OF IMPROVEMENTS = TOTAL VALUE
6 Methods used to value replacement costs;
A. Sight B. Unit of Accommodation C. Quantity Surveying D. Cubic Method E. The Square Method F. Fixed and Variable Costs
describe the ‘Modal house concept’;
Refers to a range of model houses that’s costing’s have been acquired for example the cost of a standard single story 100m2 residential house may be 700 per m2. Can be a useful basis and is extensively researched in NZ.
Depreciation calculation simplified is?
MV = RC – DEP.
That is MV (Market Value) equals RC (Replacement Cost) minus DEP (Depreciation
Describe the income approach;
Calculating a properties value based of its income producing abilities, Management needs to be factored in as a cost in this method.
The 6 steps in the income approach are?
- Estimate Gross Income Potential
- Estimate Vacancy and Rent Loss
- Subtract to get Effective Gross Rent
- Subtract annual expenses for Net Income
- Select Capitalization Rate
- Divide net income by ‘cap’ rate to indicate value
Valuation methods in summary;
Multiple approaches are often used, and are in turn correlated to create meaning. A mixture of approaches can minimize the margin of error, although no one approach is perfect in application.
Describe the term ‘Time value of money’;
“This is a fundamental concept of finance. Under this concept, individuals prefer to receive a dollar today than to receive that same dollar promised in a year’s time. This is because in the interval we could have earned interest on today’s dollar and so ended up with more than a dollar in a year’s time”
Describe the shortfalls of ‘Payback period’;
Ignores cash flows after the payback period
Timing of cash flows during the payback period are ignored
Makes no adjustment for risk
Shortfall of an ‘NPV’;
The major limitation of the NPV measure is that the investor must specify a “subjective rate of return”
The NZ Shortfall Method is?
This method is use the current market rent (rent psm* area) minus the current rent shortfalls which equals to (market rent psm-current rent psm)* area.
what is the Layer and Hardcore method?
Method is to use the layer (Current) Rent (which equals to the current total rent* total area) plus the marginal rent whose 3 floor are adjusted respectively.
3 types of property ownership are?
- Joint tenants (split equally between 2 people)
- Tenants in common (multiple owners with different shares in property)
- Individuals (one person)
Information included in a certificate of title?
Type of tenure Present & previous owners Previous sales prices Transfer documents Mortgages, and payments Building restrictions Diagrammatic documents Whether or not property faces north Restrictive covenants (fencing, obligations, buiding limits)
Protective covenants (Native trees, maori burial sites)
Easements, reserve strips and public access strips.
The 3 main principles of property in NZ are?
Mirror principle (mirror image of the legal aspects of any property)
Curtain principle (once a new owner is deemed the previous owner no longer has anything to do with the property – Iron curtain)
Insurance principle (the government will guarantee property rights to a new owner upon legal transfer)
Mirror principle is?
the mirror image of the legal documents & aspects described on those documents, of any property
Curtain principle is?
once a new owner is deemed the previous owner no longer has anything to do with the property – Iron curtain
Insurance principle is?
The government will guarantee property rights to a new owner upon legal transfer. (Guarantee title)
In NZ property is • Indefeasible ?
Once ownership is transferred it is protected by law
Describe the Torrens system;
- Identifies each parcel of land
- Computer register, unique number, proprietor, type of estate & description.
- State guaranteed title
- Indefeasible title – Frazer v Walker
- Bona fide purchaser (genuine)
Types of ownership include;
- Freehold (fee simple) – highest possible ownership in NZ, attracts highest value.
- Crosslease – held as tenants in common, separate leases, covenants relating to lease documents, usually 999 years.
- Stratum estate – unit titles, 2 or more units, common property.
- Lease hold – temporary right given to the lessee by the lessor
Explain property tainting?
If you sell a property with in 10 years your are buying a property to trade, solely to create a capital gain. Which as far as the ird is concerned is taxable. therefor a rule of thumb is that if you hold a property for under 10 years you will become tainted for life and therefore have to pay tax on each susequent property
Capital gains tax applies only when?
You purchase a piece of land with intent to sell for a profit, you sell land for a business and if more then just small alterations are carried out to a property within 10 years of ownership.
Table mortgage (interest and principal) is?
A table mortgage is a loan where you spread your repayments evenly over the term of the loan. This means that at the beginning of the mortgage you are paying back mostly interest and only a small amount of principal. As you decrease the amount of the principal, the interest also decreases, which allows a greater proportion of your payment to go towards the principal. These loans can often make it a lot easier to budget.
Flat mortgage (interest only) is?
A flat or interest only mortgage is a loan where you pay only the interest component of the loan throughout the term. At the end of the term you pay back the principal as a single lump sum. These mortgages tend to be short term and the interest rate charged is generally higher. This type of loan allows you to keep your repayment amount to a minimum until more funds become available to repay your loan.
Straight line mortgage (reducing balance) is?
A straight line mortgage is where the amount of the principal you pay stays the same throughout the term of the mortgage, which means as the mortgage period progresses the interest amount reduces. With these types of loans the initial payments tend to be much higher than other mortgages, but the repayment amounts reduce quicker over the term of your loan.
